India’s Finance Minister Nirmala Sitharaman presented the latest budget against the backdrop of rising inflation and an economy that was slowing down appreciably. There have been concerns expressed in certain quarters that India is even slipping into “stagflation”, creatd by inflationary pressures and weak consumer demand.
Over the past few months, we have seen an increase in the price of certain foodstuffs. It was noticed that the prices of onions, potatoes and tomatoes went up due to unseasonal rains, which disrupted supplies from key producing regions such as Maharahstra and Karnataka. It was also noticed that pulses have also became costlier.
This was on account of the fall in farm acreage resulting from rains in the main producing states, in addition to low price realization.
Watch out for inflation
A detailed analysis points out that the consumer price index-based retail inflation spiked to over five-year high of 7.35 per cent in December. Based on that, the government adopted different measures to tackle the emerging crisis, including higher import duty, restrictions on import, setting minimum export prices, as well as ensuring stock limits.
There were also measures taken to prevent black marketers from taking advantage of the situation. According to available reports, when we look at the ‘food inflation’ component in the retail inflation basket, it averaged around 5.3 per cent for the period April to December. When we analyse wholesale prices, we notice that the inflation in the current fiscal year averaged around 1.5 per cent during the period April-December and spiked to 2.6 per cent in December.
The government has proposed a “price stabilization fund” - this will help to control prices of food items which had pushed retail inflation to a five-year high in December. The steps outlined by the Finance Minster should spur investments. With the stress on agriculture, especially the 16 point action plan to boost agri-sector, the foodstuffs industry will, I am sure, emerge as a winner.
The progressive measures to boost agriculture shows the intention of the government to rein in inflation and get the economy back on track. Reduction in customs duty on a wide range of food items will also surely help reduce price and check inflation.
If inflation continues at the current trend, then the 10 per cent growth will not be impressive at all. Hence it is vital to control it with all available tools
The changing tax structure might also leave more money in the hands of the consumers, which could end up enhancing consumption. It was clear that the intention of the Finance Minister was to push consumers to spend more. This is a positive that will free up disposable incomes, especially among among the middle-class as well as consumers further down the income chain.
Measures to boost consumption will bring in the desired results. We see that many measures have been introduced to enhance productivity of the agricultural sector, in addition to enhancing the effectiveness of the agricultural markets.
In her budget speech, Sitharaman stated she estimates nominal GDP growth for year 2020-21 at 10 per cent. If inflation continues at the current trend, then the 10 per cent growth will not be impressive at all. Hence it is vital to control it with all available tools.
The FM also stated that the government is committed to its goal of doubling farmers’ incomes by 2022. This, if achieved, will surely benefit the foodstuffs industry.
Overall, we presume that the measures announced will help to bost the economy... and we should be seeing positive signs from the second quarter onwards.
- Dr. Dhananjay Datar is Managing Director at Al Adil Trading.